Your credit score plays a crucial role in many major financial situations throughout your life. It can be shocking to discover that there are quite a lot of misconceptions about this three-digit score that actually sums up your creditworthiness. In this post, we’ll discuss 10 credit score myths that might surprise you.
Here is our short guide to what’s true—and what’s not about credit scores.
10 Credit Score Myths:
#1. Checking your credit report hurts your credit score.
Checking your credit score is considered a “soft pull.” This doesn’t harm your credit score. However, a “hard pull” can temporarily ding your credit score. For example, when you apply for a personal loan, your potential lender will do a “hard pull” on your credit report to assess your loan repayment capacity.
The truth is that checking your credit score regularly is a good habit. Why? Because it keeps you aware of your creditworthiness. You can check your credit score for free with most credit bureaus once every year.
#2. Your annual income affects your credit score.
Your salary and income do not reflect on your credit report, and hence it can’t impact your credit score.
The truth is that your annual income is a mere measurement used to assess your credit eligibility and repayment capacity, not your credit risk.
#3. You can get access to the credit report your lender can see.
The credit rating bureau provides the lender with a detailed version of your credit report to enable them to make an accurate lending decision.
The truth is that the free or paid copy of your credit report is concise and has only the details you need to know.
#4. A bad credit score stays with you forever.
Your credit score is a reflection of your past credit behaviour, but it doesn’t necessarily last forever.
The truth is if you have a low credit score, you can make efforts to improve your credit behaviour. Your past bad transactions will eventually fade away as your score begins to improve.
#5. Debit card transactions help build your credit score.
This is probably one of the credit score myths that will surprise a lot of the readers. Debit cards are linked to your savings account and are not even vaguely related to the concept of ‘credit.’
The truth is that your debit card has no influence on your credit score.
#6. A new credit application can harm your credit score.
Applying for new credit doesn’t affect your credit score. However, if there are few too many credit applications within a short period of time, your credit score can take a hit.
The truth is that when you apply for too many credits, too often, each of the lenders makes a hard enquiry on your credit report. Multiple hard enquiries reflect your desperate need for financial help, thus reducing your credit score.
#7. Closing a credit card helps build your credit score.
You may not know this, but closing a loan account can help build your credit score, but closing a credit card doesn’t. Closing a credit card is, in fact, a negative move as it affects your average credit length.
Having multiple well-maintained credit cards and credit lines for a long time show your credit handling capability and eventually leads to a good score.
The truth is that even if you are not using your old credit card, it is recommended to keep it active as it increases your credit length and that’s good for the credit score.
#8. A credit bureau can fix your score.
When you are looking to fix your low credit score, you may come across some companies referred to as “credit repair companies.” The name could mislead you into believing that for a fee, they can repair your credit score overnight.
Unfortunately, the truth is that these companies cannot fix your credit score, but they can help you file disputes with a credit rating agency if you find errors in your credit report.
#9. Carrying a balance on your credit card improves your credit score.
The truth is carrying a balance on your credit card is potentially harmful to your credit score in two ways. Firstly, your lingering balance adds up more interest over time, and if you cannot afford to make the repayments, you are likely to default. Delayed payments and missed payments can hurt your credit score.
Secondly, carrying balances on your credit card affects your credit utilization ratio. The higher the credit card balance, the higher is your credit utilization ratio, which can potentially hurt your credit score.
#10. A good credit score means you’re wealthy.
A credit score is a sum of your creditworthiness. The higher the credit score, the better is your credit profile and the less risky you are in the eyes of the lender.
The truth is that a good credit score doesn’t make you rich, but it can definitely fetch you a higher loan amount at the best interest rate.
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at firstname.lastname@example.org.